Q1 2023 Scotts Miracle-Gro Co Earnings Call
Good day, and thank you for standing by welcome to the Scotts Miracle Gro first quarter conference call. At this time, all participants are in a listen only mode.
After the Speakers' presentation there'll be a question and answer session. Please be advised that today's conference is being recorded I would now.
I'd like to hand, the call over to Amy Deluca Senior Vice President Investor Relations. Please go ahead.
Thank you and good morning, I'm, Amy to Luca and I'd like to welcome you to the Scotts Miracle Gro first quarter earnings call I've recently stepped in to lead Investor Relations. After 21 years that Scott and other finance and strategy roles. It's been a pleasure meeting many of you already and I look.
Forward to meeting many more of you over the coming months.
Joining me this morning are chairman and CEO , Jim Hagedorn, our new CFO , Matt Garth as well as Mike look Meyer, our President and Chief operating Officer, and Chris Hagadorn Division President of Hawthorne.
In a moment, we will share some brief prepared remarks from Jim and Matt.
Afterwards, we'll open the call for your questions I.
I see that we already have quite a few people in the queue in the interest of time. Please stick to one question and one follow up.
Matt and I have additional time with many of you today to fill in some of the gaps and I invite anyone else you'd like to set up some follow up time to reach out to me directly with that let's move on to today's call.
As always we'll be making some forward looking statements. So I want to caution everyone that our actual results could differ materially from what we shared this morning.
Investors should familiarize themselves with the full range of risk factors that could impact our results.
Those can be found in our Form 10-K, which was filed with the securities and Exchange Commission.
Please be aware that today's call is being recorded an archived version of the call will be available on our Investor Relations site at Scotts Miracle Gro dotcom with that let's get started and I'll turn things over to Jim Hagadorn. Thanks, Amy Good morning, everyone I talked to in our last call about the challenges of fiscal 'twenty.
And the hard choices and aggressive actions, we took to return the company to acceptable levels of profitability.
Stated that our leadership team was on it.
And then we had full confidence in our ability to rightsize, the business and drive value for our shareholders.
This brings me to today for.
For Q1, we exceeded our total net sales go on the strength of the U S consumer business and the scrapping us of Hawthorne.
Find opportunities within a struggling cannabis market record consumer shipments to retailers resulted in strong loading and indicator of confidence in the consumer this lawn and garden season.
Sum up Q1. This way there is light ahead.
We are moving in the right direction.
We have more work to do and once again, we're on it.
Our Q1 results reflect the transformation within Scotts Miracle Gro, we're operating is it very different company than a year ago, we've reoriented our business, we're leaner, but more focused on driving the greatest value we've strengthened our financial position, we're demonstrating discipline most importantly.
Our entire company across all functions is performing to the highest levels.
Let me provide context for Q1 were working against tough comps in the U S consumer segment, where in 2022, we posted a profitable first quarter for only the second time in our history.
Consumer engagement remained high ahead of a year that ultimately was impacted by retailer shipments not keeping pace with demand what our current Q1 numbers do not show is the exceptional performance of our Scotts Miracle Gro associates.
On a much more challenging environment.
I never blinked, and they approached 23 with grit and a winning attitude.
They are making our operating plan a reality, here's a snapshot of what their hard work accomplished against our internal targets.
Net sales that beat the plan by nearly $25 million.
Gross margin improvement of almost 300 basis points against our plan.
EBITDA of $21 million against an internal forecast of zero.
Net leverage of five nine times debt to EBITDA comfortably within the covenant maximum of 625.
We're ahead of schedule and over achieving on project springboard tracking to exceed the original cost savings guidance for the year, we're guiding to mid single digit decline in SG&A versus fiscal 2019 overall I'm pleased but it's too early to declare outright victory as I said theres still more work to do.
We're reaffirming our outlook for the U S consumer business and how we see it performing for the full year.
There has been a massive companywide effort in Q1 to make the lawn and garden season a success.
Hawthorne continues to operate in a tough market, we're committed to increasing its return level, bringing it to profitability by year end.
This is less about sales although the team is working hard on this front and more about unwinding, the overbuild supply chain and excess inventory.
So far we've achieved a 40% reduction in warehousing costs and reduced SG&A and inventory by a third.
Additional optimization and operating efficiencies are in the works.
I want to provide more color around our core business is there are two dimensions to it.
First building momentum and making sure our retailers are fully loaded and all in with US we accomplished this in Q1.
Second motivating and energizing the consumer to visit stores browse and shop online and to load up with our products.
This is our focus in Q2 and Q3, we will attack both quarters with the same resolve as we did in Q1.
Early engagement is critical as we know consumers, who make their first lawn and garden purchases before may spend twice as much in the category.
I told you last quarter that despite our cost reductions, we would not stop making high value investments to enable growth.
This year, we're increasing investments in marketing and promotions doubling our lawn spend over last year overall, our total working media spend is nearly 25% higher than in fiscal 'twenty two.
And it will be more efficient and targeted.
Total media spend this year will be even higher than the pre pandemic year of 2019.
As you know the early season has already started in the south.
Omnichannel campaigns radio TV and digital activation are already underway.
We're seeing positive Pos growth in the south where in the past two weeks bonus S is up 68% in Florida and 54% in Texas.
We're also seeing strength in grassy during the same period with plus 24% in Florida, and plus 65% in Texas.
In March we will launch a national early season launch campaign.
Miracle Gro is partnering with Roku and Martha Stewart to support her new show Martha Gardens.
And this month, we will begin the largest product launch in Roundups history with the introduction of a new dual action non glyphosate formula.
These are just a few examples of what's coming.
Our investments are being coordinated with retailers, who are increasing their spend on joint media promotions and in store Activations.
Lawn and garden is the leading driver of foot traffic early in the year and our combined efforts can have a three to five times multiplier on P O S.
I stand behind our operating plan.
In a few moments, Matt Garth who became our CFO in December 1st will elaborate on the Q1 numbers and our fiscal 'twenty three outlook.
First I want to revisit our long term strategy, although we're managing our business quarter to quarter, we're starting to do so with a view toward growth in fiscal 'twenty. One we unveiled a five pillar growth strategy.
I am reaffirming the strategy.
Three of the five pillars relate to the consumer business and the others to Hawthorne.
On the consumer side, the lawn and garden pillar is a mature steady generator of cash.
The bulk of the new gardeners, who entered our category during the pandemic are still with us.
We see sustainable growth with our brands and continue to engage consumers through marketing innovation and packaging formulations and products. This includes drought tolerance solutions to create living landscapes that work in concert with the environment.
The second pillar is direct to consumer a component of category growth that includes our e-commerce and retailer dotcom sites.
A strong online presence enhances brick and mortar P O S.
Direct to consumer platforms are used to learn and shop for products.
Our lawn and garden, Omnichannel shopper, one who shops online and in store spend two times as much an art category than in in store only shopper.
With this in mind, we've improved our online product content and visibility.
And last month, we migrated to a new e-commerce platform for improved efficiency and enhanced marketing and personalization tools across 10 brand sites.
The third pillar live goods is a natural gateway for consumers and their lawn and garden journey.
Consumer purchases vegetables, and herbs have remained steady over the past two years and almost 60% of edible gardeners and tend to plant more over the next two years.
We're strong believers in growth opportunities through Bonnie plants, where we will execute with enhanced precision at growing stations and retail stores as well as invest in innovation to inspire more consumers to grow their own I'll now shift to Hawthorne, where our strategy is twofold number one we will retain hawthorne as.
The damage in the cannabis nonplaying touching space and professional horticulture.
We are the leading solution provider for growers, which differentiates us from those who are primarily distributors number two to our investment and risk capital, we will position ourselves to become a key player in the consumer and retail cannabis space in New York projected to be the second largest cannabis consuming state behind.
And California.
Digging deeper into Hawthorne I've explained how we integrated back office functions and are optimizing our network.
We're windowing our focus just as importantly, we're innovating.
Our scientists in Cologne, a British Columbia, the first R&D facility in North America devoted to cannabis research are running trials on lighting nutrients genetics and other technologies to improve yields quality and energy efficiency.
Similar work is underway on hemp, and Oregon, Florida, and Ohio, where we opened a controlled environment facility to supplement our greenhouses R&D work led to the launch of the market's most advanced and efficient Leds ever.
<unk> to 'twenty 400 D.
We've continued to innovate with the waiver led lighting portfolio for indoor growers of vegetables fruits and flowers.
<unk> is expected to surpass last year's unit sales in Europe , and North America and is now one six of Hawthorne business, we capitalize on the trend toward indoor agriculture and industry, but by some accounts is about $40 billion annually in the U S with a projected annual growth rate of 13 five.
5% through 2030.
Additionally, by modifying the light spectrum for the Waco, we can make it an excellent no frills early D option for cannabis growers.
One final point on the cannabis industry.
When it does recover and it will.
Growers will be ready to invest in Capex, we will be there to support the turnaround.
Consolidation is happening in the industry and we see opportunities for high value no cash partnerships to further strengthen hawthorne's ability to provide value added and innovative solutions to growers.
I'll shift to the consumer side of candidates through our convertible loan to Rev and integrated cultivator in retail in New York that owns the attained cannabis brand.
<unk> holds one of 10 vertically integrated licenses that includes a growing and processing operation and four dispensaries.
It's developing a state of the art indoor growing facility in Buffalo from a regulatory perspective, New York has tripped over itself in developing and implementing rules, which has prevented the market from reaching its near term potential.
But let me make this clear.
New York will become a monster market and we will see it through there is progress and value and our investment with rib.
To summarize we have adjusted the speed, which we are moving forward in our strategic pillars.
We have shifted from an accelerated pace to a prudent but steady investment approach that strengthens our ability to grow and drive shareholder value.
When we're able will shift back to a more aggressive shareholder friendly bias.
We remain focused on cost control EBITDA and free cash flow.
When we spoke last quarter, we committed to $185 million of annualized savings across the two phases of project springboard by fiscal 'twenty four.
We will achieve the full $185 million in savings by fiscal 'twenty, three and now have line of sight to additional savings in excess of that commitment.
Reflecting on the year times like these illuminate the resiliency and strength of our business and the determination of our associates.
We have exceptional leadership and talent.
We're bringing rigor to our financial processes forecasting and capital allocation at an important time in our transformation it.
It's been a real pleasure to work with the leadership team and the board of directors, which has been a great partner to me and the executive team.
I also want to thank our retail partners and banks there.
Their support and commitment has been invaluable and will contribute to our mutual success.
Thank you.
I'll close with this consumers have emotional connections their lawns and gardens.
Which is reflected in our vision statement, we help people of all ages and express themselves on their own piece of the Earth. This comes to life in our leading brands innovation and products to meet diverse needs.
Through good times, Pandemics and recessions people consistently turned to us to enhance their lives.
I've, often said, there's no better business to be in and this is true today as ever.
Now I'll turn this call over to Matt. Thank.
Thank you, Jim and Hello, everyone I would like to begin by noting my excitement with being a part of the Scotts Miracle Gro family.
I have long been a consumer of the companys products and have firsthand knowledge and achieving a great one.
Turf builder four times, a year and creating a productive garden using miracle Gro soil and plant food.
I've been warmly welcomed into the company and was transitioned expertly by Dave Evans has he wound down as interim CFO role since joining I've immersed myself in operations marketing sales human resources and of course, the finance practice to.
To summarize my experience so far we have an outstanding team that everyday reinforces the open transparent and accountable culture created by Jim and his team.
As this quarter proves the collective effort to improve the company's financial strength through project springboard is delivering the.
With disciplined focused on improvements and savings will continue while we also invest in our future and innovation to extend our leading positions and create significant long term value.
Now let.
Let me turn to the first quarter performance.
Record December shipments in our U S consumer business delivered Q1 segment sales, 8% higher year over year and combined with the robust savings from project springboard that Jim referenced.
More than offset early softness in Hawthorne.
We now expect to achieve the $185 million of annualized springboard savings by the end of the fiscal year well ahead of our prior commitment.
Springboard actions and the continued urgency of our team will create additional upside as we move into 2024 with potential savings above $185 million that we can direct towards innovation consumer activation and growth.
Net leverage at the end of the quarter was five nine times adjusted EBITDA comfortably within our covenant maximum of $6 two five times.
Let's move on to the P&L beginning myself.
Net sales on a companywide basis were down 7% versus Q1 last year.
Sales growth in U S consumer reflected the strong partnership with our retailers for the early season Buildout.
The sales and supply chain teams were outstanding and their execution and coordination and delivering on customer expectations, including getting some Q2 volumes out in Q1.
For the first half we still expect the load in to be aligned with our original plan and slightly higher than the first half of last year.
First quarter Pos at our four largest customers was in line with our expectations.
And then down 19% in units and 8% in dollars. The P. O S unit declines are consistent across our key customers and categories. As we discussed last quarter, we still expect full year P. O S units and fertilizer and grass seed to grow by 10% and unit volume in other product categories to remain essentially flat.
Versus fiscal 2022.
Early season performance in our southern markets indicates that we are tracking well against our expectations.
Recall that Q1 represents less than 15% of the full year and our focus is appropriately shifting to our peak season in Q2 and Q3.
As we entered the year with retailer inventory units slightly down versus prior year, our strong Q1 loading and the expected decline in P. O S have brought retailer units slightly higher.
Replenishment orders in the second half will be driven by consumer takeaway and the inventory management actions by retailers.
Our plans align with our retail partners a year end target inventory positions and we are monitoring the consumer condition to ensure we act quickly to align production with any changes in demand levels.
Turning to Hawthorne.
Continued industry wide challenges yielded a 31% top line decline year over year.
This result was driven by a lower retail and professional grower activity stemming from oversupply and general uncertainty on when the market will become more balanced.
Our original guidance estimate at Hawthorne sales would be flat to down low single digits for the full year.
Given the soft start for the business and the state of the industry as a whole we now expect Hawthorne sales to decline, 20% to 25% year over year.
There are many reasons to be excited about the future of Hawthorne.
We're taking the appropriate prudent actions to achieve run rate profitability by the end of the year.
Also strengthening our position for the future.
For the full company, we previously guided to low single digit sales growth for the full year.
We now expect a low single digit sales decline in fiscal year 2023 is a more reasonable expectation given the market challenges Hawthorne is facing.
Gross margin for the quarter was 20% down 90 basis points versus last year.
Strong U S consumer volume and pricing better segment mix and sooner than expected progress against our springboard targets, largely offset lower hawthorne sales and higher conversion and commodity costs.
We continue to expect that gross margin will decline slightly in fiscal 2023 as impact of lower Hawthorne volume will be offset by springboard savings.
As explained on the last quarterly call commodities are now about one third of our total cost of goods sold due to historic inflation levels.
At this point, we're about 65% locked on our total commodity costs in north of 70% locked on total Cogs. So we have a fairly good visibility for the rest of the fiscal year.
We are seeing some bright spots in international freight rates resins and pallets.
While our larger inputs like diesel and urea continue to move with underlying energy related commodities.
The team has executed well and working with our customers to manage inflationary costs and delivering pricing to largely cover our dollar exposure.
Our progress on project springboard is most evident on the SG&A line.
Which was down $26 million or 17% versus last year.
We guided for full year SG&A to be below fiscal 19 levels and given our first quarter results. We now expect a mid single digit decline from fiscal 19.
Going further down the P&L.
Interest expense is up mainly due to increased borrowings and higher interest rates.
Call that we guided to additional interest expense of up to $40 million in 2023.
Given the move in sofa and our spread at current leverage levels. We now expect incremental interest expense to be closer to $60 million for the fiscal year.
The adjusted effective tax rate in the quarter was 25, 5% and we anticipate the full year ETR will be between 26 and 27%.
I'll also note here that we anticipate fully diluted shares will increase by approximately half a million shares through the end of the fiscal year.
That brings us to the bottom line, where our net loss for the quarter on a GAAP basis was $65 million or $1 17 per share compared with a loss of $50 million or <unk> 19 per share last year.
On an adjusted basis, which excludes impairment restructuring and other nonrecurring items.
We reported a loss of $56 million or $1 <unk> per share compared with a loss of $49 million or <unk> 88 per share a year ago.
On a total company basis.
Overall year over year decline was completely driven by non operating factors, namely higher interest and tax expense in fact.
Adjusted EBITDA improved to $21 million this year versus a loss of $1 million last year.
Adjustments to arrive at non-GAAP adjusted EBITDA from our net GAAP operating loss in the quarter are detailed in the press release financials and include $19 million related to our ongoing restructuring efforts, including the Hawthorne integration costs and other project springboard and issues were.
We are modifying our full year adjusted EBITDA guidance, given lower than expected depreciation expense, mainly due to the timing of capital expenditures and Hawthorne impairments. We now expect the full year increase in adjustments to be less than $20 million, resulting in low single digits growth in full year adjusted EBITDA.
Now, let me turn to an update on our capital allocation approach.
Face no near term refinancing risk and ended the quarter with over $800 million and Undrawn revolver capacity.
We expect to manage the seasonal working capital build through this year and stay within our financial covenants.
We will direct our free cash flow to debt Paydown.
If you're in a net leverage ratio below four by the end of fiscal year 2024.
We're deploying capex of $100 million in 2023 funding maintenance requirements and high return short payback projects.
Our outlook also includes continued support for our quarterly dividend and some we will maintain tight capital discipline and drive leverage down while ensuring we fund the innovation and capability to deliver long term growth at SMG.
Please keep in mind the guidance that I've provided does not without risk.
We are diligently managing what is within our control.
Performance in the back half of our fiscal year is largely driven by consumer engagement.
We have an aggressive and creative plan that is in lockstep with our customers to activate the consumer early and throughout the season.
Also share Jim's excitement about the long term prospects for Hawthorne and the potential for growth and value creation in the business let.
Let me close by putting the first quarter into proper context, Q1 is typically less than 15% of our full year.
The peak of our Euro is fast approaching and I have confidence in the plans we've put in place and the ability of Mike look Meyer and his team to execute.
With that I'll conclude and return the call to the operator, so we can take your questions. Thank you.
Thank you as a reminder, if you'd like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again, one moment, while the compile the Q&A roster.
Our first question comes from Jon Andersen with William Blair. Your line is open.
Hi, good morning, everybody. Thanks for the question.
I wanted to ask first on the U S consumer business.
Two parts.
One.
Can you talk a little bit more about any early season reads.
That might kind of enhance your confidence.
And I guess, particularly the lawns business and the recovery that you anticipate in the law in the business and in.
In 2023.
And the second part is.
Yes, I'd love to hear a little bit more about the marketing plans, you're talking a lot about kind of leaning in and activating consumers early in the season across the country and how important that is.
Have you taken that approach in the past has it been successful what are some of the details around that thank you.
Okay, John Hagadorn here.
<unk> bin I tell people I'm not going to.
Like try to answer all the questions, but this is a good one.
First let's start with.
The budget, we put in and I think it.
People can say, well youre sandbagging or whatever.
We think we are pretty conservative by putting basically flatter and remember lawns was down 20% last year and our view is almost entirely on weather.
California, Texas, Northeast, Midwest, which I don't need to go through that again it sucked.
The so were plus 10 with lawns zero for everything else. So we don't think we have a particularly challenging number because I think many of us who've been in the industry a long time said.
Just a very challenging weather year.
For us and I think the same is true in agriculture, So anybody who's following I think knows that.
We speak the truth there.
The early season numbers on lawns actually look pretty good.
I don't know Mike, Yes, no I mean, the last two weeks are up 57%, 64% sure Barry.
We applied promotion.
It is really good.
Moving.
So we need lawns too I mean, we do need launch to work. In addition, I think Bonnie is seeing similar kind of like very positive numbers early season. So I think the early season, it's conservative numbers.
And I think this early parts of the season will look pretty good so far so I'd say that.
How do you want to talk about like patio runs the brands.
Good morning.
Thank you Kent.
[laughter].
As the leaders in the marketing partners. We are really excited about the season and we are.
Particularly pleased with our early season activity, which we've already seen in the south working well with our bonus S product offering and we have a program in partnership with the retailers.
Launching in the very early season to reflect Jim's comments earlier about how we know that early season consumer pace and spend more in the category and the program is named Daylon savings and we are doing that in partnership with a retailer and getting out even ahead of their black Friday promotions. So we will continue to support this consumer get them in.
The category early and we're excited about the potential of the program and what is it going to do to stimulate and the spend is real high very high. So nobody is messing around here I think the retailers wanted to work we want it to work for spending behind it.
We've got new talent on the sort of regular.
Lawns advertising replace Scotty Scotsman with a new.
Personality.
And the.
Big event at the beginning of the season.
So we're not I.
I think part of what we had happened last year John was.
We are still waiting for weather before we'd fire.
Our activation dollars and we never just had that that that weather.
And that gets to be a point, where if people haven't bought and it's getting late in the year and the weather is kind of cool and wet and people say my long looks great anyway.
A big reason to get them out early so it's a little bit of a back to the future approach, but it's <unk>.
Very well coordinated and being spent against very heavily so I think we feel pretty good about it and the Pos So far I think says there is no significant problem with the consumer at the moment.
Thank you I'll leave it at that thank you John .
Thank you. Our next question comes from Joseph Bello with Raymond James Your line is open.
Hey, guys good morning.
Hey, Joe I guess, a question on U S consumer as well.
Taylor inventories he touched on this it sounds like there are a little heavy.
How much of a headwind might that be to your shipments this year.
Two our planned I would say that there is no problem with that so we're just looking at in our plans we baked in that they may what again.
Bring them down based on Pos a little tighter.
Thats a conservative look.
So they have not really talked about it they have significant amount of inventory Joe and in my prepared remarks, what I said was.
We came into the year with retailer inventories low and with the strong December that we had plus lower year over year pass those inventories have come up however, the retailer inventories are still below where they were last year I think of it like 7% below last year at this same point, yes, so and I think internally Joe.
The conversations here.
Clearly we had a positive.
First quarter, a lot of a lot of work went into that.
I think Luca has been pretty clear that.
Sales that.
Came in in Q1, he has not really changed as first half load plan. So we're not assuming that.
It's.
Additive so I think look as being conservative for the first time ever.
But I'm worried about running out of product because I think it is going to be good but.
That may be our biggest issue Joe is just that.
Where we.
We're just working really hard to keep the supply chain.
Tight.
Okay, that's helpful and maybe maybe at Hawthorne.
Three months ago, the outlook for that business was call it $700 million of revenue this year and now we're looking at.
Roughly $5 50, so it's changed pretty dramatically here in the last.
But I guess one.
Have things gotten worse or do you expect some sort of recovery to assuming revenue of $5 50, what does that mean for per segment loss in fiscal 'twenty three.
Hey, Joe It's Chris I'll take the first part and I'll, let Matt take the second part.
Yes, it's really it's sort of your latter assumption. There is that we had we had baked in assumption of some market recovery.
In the earlier part of this year into our plan going in.
Still expect to see some recovery in the marketplace, but.
But it obviously didn't materialize this quarter the way that we've been hoping.
No I mean.
I think it's worth noting I got a text message from.
<unk> Ross yesterday and this was this is someone who he was the president and CEO of General Hydroponics, when we bought that business and some of them stay close with over the years and very plugged into the industry can you reach out to me Unprompted yesterday, and said Hey, just thinking about you I just want to let you know I feel the winds at my back out here in California for the first time in a long time so.
We're starting to hear some rumblings in seeing seeing some signs I think that the industry beginning beginning to gain traction, but obviously with the way the last year plus has gone we're going to go.
Wait before we start.
Counting counting our checks, but I'll, let Matt take the second part.
And on a profitability perspective, we werent really calling for a significant increase or additive EBITDA to our full year projection coming from Hawthorne. If you remember coming from where we were last year.
The efforts through project springboard to realign the cost structure with where we are from a demand and revenue component.
That was going to bring us to some positive EBITDA contribution now with this call down on topline revenue that brings it down a little bit sort of hovering around breakeven plus five and so we're going to navigate that as we continue to go through the rest of the year.
Chris just said whatever bright spots are there.
Kind of mitigate any further downside.
That may come so we sort of split the difference on that 20 to 25 outlook coming off of a 31% down first quarter, we're calling again up for quarters going through the rest of the year and so that has some positivity that we see.
Okay, great. Thank you guys.
Thank you. Our next question comes from Chris Carey with Wells Fargo. Your line is open.
Okay.
Hi, good morning.
Just.
I just wanted to confirm.
U S consumer so shipment.
Flat for the front half of the year, just just to be really specific would imply.
Shipments being up in Q2.
And.
What's the expectation for Pos for the full year will obviously shipments are going to track below.
Is it.
Are you, saying organic sales growth for the U S consumer business should be up in the high single digits. This year and maybe shipments are not down that much.
And with that sort of outcome would you expect margins to be able to re expand in the U S consumer business or is the commodity.
Impact and the other things that youre seeing still going away.
So let.
Let me, let me clarify something there what we're calling for is on the top line. When you look year over year Youre actually seeing overall volumes down as we pointed to in the call last quarter, but we are pushing through the pricing that pricing that we put through is carrying through when you see that in the press release.
Detailed very nicely so.
First half of the year will be slightly up on revenue again, if you look at that first quarter performance outpaced what we thought and Jim spoke to that we'd probably pull Dan kind of $8 million to $10 million from Q2 to Q1. Jim also just said that we're forecasting that we're going to hold that as we move into the second quarter.
That proves out a really strong first half however, again.
Volume slightly down turning meaning shipments, but that pricing coming through from a Pos perspective, youre, absolutely right I'm going to speak to this in two components one what's been demonstrated.
And how that's performing and you heard that from Texas and from Florida. The early spring season areas of the country, performing well and showing good signs of consumer engagement.
That leads to where we stand for later in the season here in the northeast and other parts of the country as things start to warm up again still looking for a Pos that is going to be slightly down, but again pricing very strong and as Mike just said should the consumer come in and a good level recall that.
We've made adjustments to our operations, we are producing at a lower level at this point.
To help us from a cash perspective, and so we will be working very closely with our customers to ensure that they have the product they need should pass come in stronger.
But Chris.
Chris Jim here.
I would say from my point of view and I'm not sure what.
Mike would say on this but we struggled I think pretty heavily with Dave as we kind of put together our forecast for 2003.
And.
Mike and I basically just plugged zero.
And it's not because we think the consumer is sick or anything we just wanted to put a conservative number in and plus 10 on lawns. After minus 20, which we thought was weather related we thought was also conservative and safe. So we were basically looking to build the revenue.
Numbers that were just were safe.
And so I personally wouldn't read a lot in that I think next call we're going to know a lot more how the consumer is doing.
But I would not try to put too much precision into our forecast. We were this was a pretty wicked.
Discussions internally on just what we wanted to commit to and not get on the wrong side of everything so the flat was not because really anything other than we just wanted to put a number we were confident after what we've just viewed as a really crap.
At year last year.
Yes that makes sense.
Yes stay flat you mean, you mean your organic volume shipments in the front half of the year you are expecting flat just to be just to be clear sorry. It's.
I just wanted to confirm that I didn't mean to interrupt.
No no. It's okay youre the one asking the questions and we are here to answer.
So volumes are going to be slightly.
Up in the first half across all categories.
Categories.
But when we were talking I guess the outlook that I gave Chris just to be specific about that slightly higher year over year for the first half is on the top line.
Great.
This is people here all motion.
Okay.
Sure.
Okay. Okay, Okay, and then just as a follow up.
Yes.
Sure for the Hawthorne segment right. So this glide path to improvement.
And profit by the end of the.
For the year. So are you, saying that you expect by fiscal Q4 that the segment profit should effectively be euro that youre running neutral and between now and then youre running negative. So again the idea is to.
To get flat by the end of the year.
And then just.
Just on that do you have any view on our U S consumer.
Margin your ability to be up or down just on the prior prior question. So that's it for me.
Yes, I think Thats, obviously, youre coming out of the first quarter Youre seeing the segment profitability.
In Hawthorne, so yes, the glide path as we move through the year, we'll be improving and I think we're going to get another bite at that Apple.
Here in the second quarter as we start to see some seasonal uptick. So we'll keep you abreast of what's happening in Hawthorne next time, we speak and the full year outlook, there, but yes progressively improving as we make our way through the quarter.
From a U S consumer margin perspective.
<unk> seen a lot actually take place in terms of what we had expected I think what we had originally communicated and versus last year, we were able to do the performance of the team the costs that have come out of the business. The efficiencies that we're running have put us and you saw it in the gross margin line as well.
And in a good position to start to begin to think about how you recover back to those sort of early 30% mid <unk> type margins in U S consumer that Mike likes to talk about and that that is going to be a combination of higher volumes coming out of the production facility.
It's going to come with time, and maybe we can get some of that this year I remember we call that down for this year and the other component of that is going to be what happens on the commodity side and so watching that and I. Just said in my prepared remarks, we have about 70% of our Cogs are already tied up so pretty good outlook for this year.
That'll be helping us progress back to those margins as we move forward.
No.
I think it's going to recover as the commodities adjust we also have a bunch of cost out as well.
And so.
And then mix is always a factor for us so strong on season, it's a good mix.
So I'm pretty optimistic we're going to get back there over overtime.
Okay. Thanks, so much.
Thank you.
Our next question comes from Eric <unk> with Cleveland Research. Your line is open.
Good morning.
Eric.
Two things if I could first of all Matt.
Matt you talked about.
Upside to SG&A saves into 'twenty four I just wanted to dig in a little bit to 24, obviously, we've got a long ways to go in 'twenty three but as you think about the amount of SG&A, you've taken out of the business.
And this is mostly on the consumer side.
Im just trying to get a sense of how much do you have to reinvest back into the business in 'twenty four.
To serve customers and to drive the business or is the cost structure and the operating structure in 'twenty three.
Sustainable and then growth in 'twenty four and beyond.
Leverage off of that.
Well I'm going to take that from Garth.
To start at least.
If you look at our.
Sure.
In store merchandising sales force.
We are.
We're in good shape there if you look at the innovation work that's happening in R&D.
We're in good shape there.
We are definitely a skinnier team than we did accept.
Eric you might remember that our biggest issues is we were chasing these five pillars.
Was you on what army.
We hired a lot of people.
So we're kind of back it with.
Okay.
Figured I'd like.
Yes.
I think people are starting to feel better around here, but there was a lot of PTSD here.
This has been a it's been a goddamn trip.
But I think that the teams are smaller.
A lot of in this building.
A lot at Hawthorne.
And I think that that's pretty much where we plan to be I don't think we have a lot of spring back where we have to.
Fill in a bunch of gaps and were not doing things, we should be doing I think we've been really mindful of trying to spend the money, where we need to spend it.
Marketing dollars are up.
In store dollars are good.
I think we're pretty well configured and I think.
We have not committed to everything that we think we can do and that's I think what garth as sort of.
Pointing at and saying Theres more sort of.
Sustainable.
What's the G&A that youll see in 'twenty, four but I don't think I don't think any of the teams.
Are really saying, we need a lot more people I think where.
We were pretty careful in.
If you look in my hallway, it's a lot there's a lot of different people here now.
Syed.
I think we've been very careful to say that people who.
Stayed are people, who think we can operate this business much tighter than we were before it's really the growth.
We were chasing that growth I don't think we're unusual I think a lot of companies right now we're talking about that but.
We were pretty careful to select people who.
Like the way, we set up now and if people acted like they didn't like it they're not here anymore.
So Mike anything you'd add on that I think we're streamline or I mean.
Yes, my ninth year of President.
President and COO.
When I first took over it was pretty streamlined we invested in a lot of things to chase growth and I think we've readjusted, but we're not cutting the fundamentals of sales and marketing with our foundational things and then we're just more measured as we build back we still want that growth. We still believe in that growth. How we get there will be a lot more efficient.
Okay. That's helpful. And then the second question, Jim You mentioned the pillars.
I am Hawthorne I, just wanted to understand a little bit better your perspective.
A quarter or two ago I think you wrote off.
Maybe $1 billion you had invested in this business.
And this year you took the revenue target down by 20%.
I guess I was a little surprised to hear you say, we're still committed to the two Hawthorne pillars from 'twenty one when that world has changed so dramatic that you had to write off basically the capital you put in the business why still commit to those pillars isn't.
Yes, I'm just trying to figure out your vision it sounds like it's the same it was two years ago. When this world has changed no I wouldn't say it's.
I wouldn't say, it's the same.
I think we have been.
And listen we run our own business and so I'm not blaming anybody wouldn't that can like a victim here, so don't misread, what I'm, saying, but we kind of paid.
For that business.
We still believe in the growth of the cannabis.
Sector.
It's a it is a bloodbath out there I don't know that was forged a fortunate like two or three years that it's going to be a bloodbath well it has been.
But we're invested there and we look pretty carefully at our business.
Garth coming in.
<unk>.
With Mike and Chris and myself and sort of thing.
Do we want to be I mean, if it gets down to sort of pillars.
And.
And it's a.
Kind of low single digit growth rate and.
This is this is not chasing the value of the equity, but it basically says.
Yeah.
What we get from direct to consumer what we get from live goods.
What we get from Hawthorne.
As is growth.
And.
We got alongside of that we paid for that.
We've taken the pain for it and the question is do we just.
Throw it set it on fire.
I had a situation with.
Smith <unk> hawken.
During the.
Economic crisis in OE.
We bought that I think we had thought we had a deal with home depot.
Didn't come together.
And it kind of screwed up boy with Nardelli.
But.
Dave was the CFO back then he said look we don't have a forecast for profitability here, Jim and nobody is putting it together.
Everybody is contributing and Smith <unk> Hawken, you need to make a decision on Smiths omni put directly on me and I sort of.
We burn that thing.
We.
Auctioned off the pieces and it was a pretty bad experience I regret it today.
Smith.
Hawthorne is not in that same situation.
If you could.
You could say roughly that half of the profit as Smith <unk> hawken.
Hawthorne.
Is.
We burned by setting up a supply chain that was just.
Bigger than clearly we need right now.
That is worth I'm going to call it north of $50 million.
So I think this business can get back to pretty easily kind of a 10% EBITDA margin.
And.
That's kind of my view of opening Stakes.
Sort of be a contributor here.
And.
I think we I think we get there and I think a lot of this happens because we resize that supply chain is harder than you think because there's a lot of inventory there and we've got to work through it.
And we will but.
We believe that there is growth in that business that it's about a screwed up that you can get I blame a lot of this myself on very poor public policy I mean, all you got to do is look at New York and say could it possibly go worse than what's happening in New York.
But remember in California, They went recreational in California, and the entire country was down 50%.
No.
Safe banking didn't happen Theres, a lot of things that we thought would happen, but if you want me to.
I do think.
If.
I do reflect.
Occasionally.
And I think we assumed you would have federal normalization.
Bye now.
That has been much more challenging than we thought.
I think that you look at Oklahoma, and Michigan as far as.
Issuing permits far in excess of what the states require it just it's pretty screwed up but we just think that without.
We're fully invested in this space.
We are committed to seeing it through and we think it will give us a growth rate that's in excess of what the consumer business can grow and ultimately we think we need to show growth and we can do it profitably.
That's my view.
<unk> got a different view absolutely not.
And as you said, we sit down and go through this on a fairly frequent basis.
You are sitting right now Chris and I think you are very aware of this Eric Eric I'm, sorry, yes, <unk> been moving backwards.
Probably not in the most advantaged position however, what.
What we do.
And I think this is not just me, saying it as everyone in the business is fairly unique and the proposition that we have the strategic position that we have the customer position that we have all put you in a very good place for an industry that has a somewhat longer timeline and we thought that being said you also heard Jim talked in his prepared.
Our remarks that this opens up some strategic options for us which are.
We feel we're in an advantage position given what we bring to the market.
There are others out there who may not be in that position, but we can all benefit with together. So just looking at it from a holistic perspective, how you maneuver through this market how do you strengthen our position and how we set up a business that on any type of recovery is in a strengthened winning position is what we're looking to do.
Understood that's very helpful. Thank you.
Thank you. Our next question comes from Andrew Carter with Stifel. Your line is open.
Hey, Thank you good morning, I wanted to ask about Hawthorne, just digging into it like the 31% decline I know leg is completely incremental I think you said a six so is that a sixth incremental but could you also dig into kind of signature brands versus non distributed and how much how much of that non distributed kind of rational.
Or kind of shift in focus youre, making this year.
As is reflected in your top line outlook for this year and also in the quarter. Thanks.
Yes.
Yes, hi, belly up to the bar.
Andrew So we're looking this year at.
Our signature to distributed breakout of about 65% on the signature side of things, So whiting and new trends continue to drive that for us.
But the question is are you focused.
Focusing on your products.
Yes, Andrew Hey, it's Chris Yes, I mean, the focus is and Tom can give you again more specific numbers.
Certainly, Amy and Matt and follow ups, but the.
The philosophy that we're moving towards here and this is really as we look at how the market has evolved and frankly constricted here over the past year. The philosophy is certainly to move towards more of what we're calling internally a signature plus model, which is to focus much more on our owned brands we have some.
Distributed brands that we have unique relationships with these are brands like quest to humidifiers, and then theres other brands and products.
That are.
At least currently we think essential.
<unk>.
Parts of our portfolio parts of our offering that we don't make a great deal of money on and we don't feel like a great value proposition for us, but again, our customers require them. So I'd say, we're in a transitional period right now moving from what has really been a distributor business with a slight emphasis on our on our signature brands to much more of a signature offerings.
Yes, just I guess, besides Andrew key focus on the brands that we own the brands that we've developed the innovation that we continue to develop it.
Continuing to also take a hard look at partnerships out there in terms of where there are other key pieces of the category that make it makes sense for us to stay really close to.
All in the spirit of doing the right thing for the grower.
Yes, just to be clear I guess, the I guess I'll save my question better. So Thats 65, 35 split I guess I was asking do you expect that 35 to go down quite a bit through the year I E.
Added headwind to sales, but one that might not show up much is that's what I was asking do you expect that split to move meaningfully in any kind of associated headwind.
Hey, Andrew I think for the balance of the year it will probably remain relatively steady.
35% distributed.
Ratio.
Again, I think the shift towards signature plus is going to be something we'll see more over the course of I would say that the next 24 months or so.
Is that and we expect that we'll be able to replace a significant portion of those distributed sales it will be choosing to move away from.
With signature sale. So what we're hoping for is not a huge step back in terms of overall top line revenue from those sales and again, that's not considering what we expect to see in terms of recovery in the marketplace.
But a good deal more profitability on each dollar for dollar so.
Got it I'll pass it on thank you.
Thank you.
Thank you. Our next question comes from Bill Chapell with tourists. Your line is open.
Just a few things one I guess looking back at <unk> I'm a little confused.
Was this.
Significantly better than you expected or was it more of a timing of shipments you said.
Last year part of the problem was retailers didn't order in line with demand and so that would assume that there would be.
It kind of out of stocks or inventory that you had to replenish and then you also said that there was imminent.
At retail so and then I think you had said there were some <unk> shipments that came in <unk>. So just help me understand like is this kind of a it's a good start.
We'll know more leisure or are you really ahead of plan.
Just starting out.
Yes.
Alright.
I think I understood. Although it became somewhat garbled. So I don't know if youre on a cell phone bill.
I think the more.
I think the quarter was a lot better than we thought it was going to be.
Remember that we had in December .
So.
We were really managing.
At least I was very focused on sort of leverage.
In the quarter.
We had agreements with our retailers on a rational first half load.
We probably came out a little bit better and not by much but I think we said $25 million.
Better.
But that was not without challenges in that we had that period right before Christmas where it got really cold.
And shipments became a little bit.
Painful and I think the supply chain team did a fantastic job kind of managing orders to get them out.
I don't think we have a inventory problem at all at retail.
And I think that the springboard work, which was the entire company.
Did fantastic and that Theres no. One person you can sort of give credit too. It was a real company effort under the gun to.
Get the orders out.
And drive our expenses down.
Through a lot of.
Very challenging sort of decisions that we had to make especially regard to people.
So I think we had a a good quarter.
Four.
Those people, who know us well you do.
It was a.
I think a lot of last year.
I think we take a step forward and it felt like get two steps backwards.
Things were.
And the Great thing about this company is that the company.
As a company that with a challenge operates well as a group.
So that all came together.
At the end of the quarter to a result that was better than we had.
Expected.
<unk>.
We were working to stay within.
625 coming in at $5 nine was a really good result for us.
And a lot of people have written on where they thought leverage was going to be for us.
It is a big success for us to have gotten through this.
And it goes back to our team and our retailers.
Agreeing to sort of numbers and not access of low this is a natural load for us, but what we needed was.
Commitments for.
For Q1, and Q2 that would meet the load, but given our tightness for leverage would make sure that as long as we could execute on our side.
We could we would get the inventory in and had orders in our all of our retailers were fantastic.
Getting product in.
And.
Our team did the work.
It was a good result, Mike I don't know.
To give a lot of credit to Luke.
Luke and I gave a lot of credit to the people who were running springboard.
Because this is a.
Yes.
Springboard is a day to day.
Very intimate view cross functionally at the numbers.
Meaning that everybody had to do what they said any deviations had to be noticed immediately.
I think in the past we have not operated that site, but this was.
Our requirement for where we were and then I think the sales and marketing side and the supply chain. The operating side of the business did great and Mike you deserve a ton of credit for that.
I think our retail partners working with US we all want to be ready, we're spending earlier, we want to get out of the gate fast we have to get the store sets done we wont be inventory in there we do not want to be chasing inventory.
And I think we are.
Ahead of that right now so.
And so then we want to consumer takeaway.
That's another thing which is that the retailers.
Everybody cares about.
The strength season, everybody wants has a weird concern about I've got just read the papers.
I think feels like it's kind of easing up a little bit I think but I.
I think if you talk to the merchant partners and you probably do.
I think everybody wants the season to happen and so people are not backing away from lawn and garden. They are very much focusing on lawn and garden.
That benefit accrues to us right absolutely.
Thanks, and then just kind of specifically on Bonnie.
It's the gateway you talked about in terms of bringing consumers in but I think that business has underperformed your planned two out of the past three years that you've owned it.
Or have majority ownership.
On a different that's going on this year.
I would say urban vegetable actually performed well we expanded into some flour.
And that did not go as well, which the whole market was down.
And our execution wasn't there. So we're really focused on getting out early indications are I mean, youre going to see is much more integrated.
With our field sales in the northeast.
But it's about execution and not getting out and doing a bunch of plants away.
So.
I'm expecting a good year from Bonnie very focused but Mike I mean fair enough but.
If you look at the last couple of years have you been disappointed.
Disappointed.
So.
Especially in our expansion opportunities.
So.
Amiss there.
Too many varieties not.
Not very good execution on some of our expansion opportunities and by the way part of that is our fault in that we have got a lot of say in what happens there we push them into a lot of stuff and this doesn't mean against there.
What they wanted to do.
But I think that this is a huge volume business.
And we've learned a lot.
And change and that business has been I think harder, but I think the team is on it and I think Mike and the group down it.
Our partners at AFC, and the guys that Bonnie and women.
<unk>.
Pretty organized and they know they have to achieve this year, yeah, we tried to change a lot and Bonnie.
It was a little too much so.
I love that business and it is a gateway for us I mean, it's still is at 6% to 8% growth, which is beyond the U S consumer and tie in and the execution together.
As a path for our future growth.
Not giving up on it.
Just want to executed better is what I would say.
And then one last one on Hawthorne.
Uh huh.
New York a couple of times.
Can you just help me understand.
If youre going to invest further into that and why that you say it could be the second biggest market in consumption and some would say it already is the second biggest market in consumption. It just elicit and so how does that actually benefit you.
They still don't get supply by Oklahoma, Michigan, and California and.
How does that actually change coming opportunity over the next four five years.
<unk>.
Well, that's you save the biggest one for <unk>.
Last I think.
Yeah.
I'd start by.
If people are going to be selling out of their trunk set our cars are in bodega as and the state is not going to do anything to enforce.
That's a big problem and it's a big problem in Canada.
And to.
To take a business it is.
The size of the beer industry.
And have people, making the stuff in their backyard and selling into the chunks of cars.
It's not how the market should rollout and there's plenty of history.
Colorado is a good example of the market being rolled out in a sort of.
Much more thoughtful way.
So I think you say.
It is a big market.
And we.
We believe that.
Starting with the governor and the legislature.
That they will be rational in.
Allowing the people who spent the money or have gotten permits for the social justice side.
It can actually make money.
I don't think that theres, any like short or midterm requirement for capital in that business I think that business is property cat is properly capitalized.
And had and maybe one of the few.
Permits in New York that is sitting on in excess of $100 million in cash.
So this business is capitalized and.
Giving up on it.
I don't know really what it accomplishes.
We don't own shares in Rev were a creditor.
<unk>.
And.
We believe that that marketplace is right I also want to talk to our partners.
That our investors and risk.
That we don't view this.
As just alone we view this as this market.
Matures.
And we've got very simple sort of rules internally on this conversion I don't know if we've actually talked about it outside.
Which is that.
The ability to normalized relationships with banks, meaning that plant touching businesses can bank.
And U S exchanges, Nasdaq or Navy.
Allow.
Companies to list.
That touch plants. These are really our conversion sort of parameters. It doesn't assume on legalization federally it assumes kind of that we can bank.
And have a relationship with the public exchange and I don't think that Thats crazy.
Crazy, but I think what that tells people as we we act like we're equity holders, but we're not where we're sort of creditors to that business. The only creditor and the most senior creditor, but the business is capitalized it is a monster market.
We're not chasing multiple states down here, we basically said.
We want a big state, we kind of focused early on and I think you guys knew this.
New Jersey, or New York, one of the Big States New York.
We landed that that that license.
It would be very easy to say you overpaid for it I think we'd probably would.
Not our head to that but that's where we are the business is capitalized and where we're going to see this through and we think ultimately it's worth doing.
But we're not.
Required to put more money up.
And we're not chasing it to the extent, where we don't think it's it's actually theyre actually moving.
Ahead like we want if the state of New York would actually.
Come out with their rules and listen to people.
And <unk>.
Try to give the not just us but the other msos.
Who invested billions of dollars in their footprints in New York.
Some.
Advantage here for the amount of money that's been invested that would be helpful. But it's frustrating, but it's it's worth doing.
I think every time, we say to ourselves.
Plus we're in so it's like there's nowhere for us to go.
They're not in default.
They've got the money to see this through.
Sure.
Going to hang in there.
B with them, Chris anything you want to add on this sure. Yes, I think you said most of it but look reserves, which and its a business that I.
I pay a great deal of attention to and I'm on.
The board of that company.
<unk> has.
One of if not the strongest and most unique balance sheets in the cannabis industry.
As Jim touched on they don't need further investment at least not for for some time.
And New York, Yes look it's right now I think anyone who walks down the street in Manhattan and steps into a corner Bodega sees that there is a rising illicit market there.
That is not something we expect to persist over the course of many years.
When the legal market there becomes the standard which it will.
We believe resin attain are positioned to be.
To be really just to be I wouldn't say dominant in state, but to take more than their fair share of the market.
Just because of the resources they have at their disposal. So.
It's something we remain really enthusiastic about.
The last year had a discouraging moments of course, it hasn't anyone who's been involved Mckim century, I think knows that has experienced it but the commitment on our side certainly on my side remains.
Pretty firm and I think the upside that we've seen it's pushed out a little bit but.
And thesis is still in place.
Great. Thank you.
Thank you. Our next question comes from Gaurav Jain with Barclays. Your line is open hi.
Hi, Good morning few questions. So one is on the leverage of the company and the bonds. So they are trading at 85 cents to the dollar so youre going to clear it out like $1 2 billion of debt with this $1 billion of free cash flow you will generate in the next two years and accelerated the deleverage.
Understand your outage took payment restrictions because of higher leverage but.
Is that an option you can look at and I think that you can buy about $25 million per quarter.
And it comes to these bond.
A lot of buying it in the open market. So all of those options Youre looking at.
Yes, I think we have a number of opportunities.
To use the free cash flow that we're going to generate to deleverage.
You just named one of them and the practice of going through and determining what our highest cost debt is.
What the opportunities are and what we go through so as free cash flow is generated we'll direct it to the highest interest rates to pay that down I will tell you that we do have a very nice maturity profile. We have a very good structure in place for how our debt is laid out and the rates that we have on our bar.
Bonds are very advantageous so the prioritization with more than likely be taking care of the term loan a.
Getting the revolver back down and then looking at the bonds for potential opportunities to buy them and then let's say over the next two years you generated this $1 billion of free cash flow EBITDA has improved because of raw material prices have come off and level of disclosure to Forex and then what happens like the excess.
Free cash flow Dennis started getting back and rested again in cannabis ventures, because you still believe in the long term thesis.
Sure.
Thank you for the trap.
No I think what we've tried to convey to all of you in this conversation.
Is a disciplined approach towards growth.
Thereby we are measuring every dollar and determining the potential payback and the returns that we would expect to generate.
As it comes to Hawthorne.
Those types of investments that we've made and the conversation that we just had with you heard Jim say noncash.
The cannabis industry. The companies that are involved and there are at.
Very very low valuations there are opportunities noncash to consolidate and provide a basis for value creation moving forward.
The free cash flow prioritization that we talk about when that youre pointing to is one ensure that we are investing in the organic growth and capability of the company. Those high return short payback opportunities. We have inside the company is doing that making sure that we do that at the 100 million.
A capex, however, we could probably spend $125 million to $150 million and continue to position this company for growth and free cash flow generation and those investments.
Moving back down to four times leverage gives you the opportunity to start looking at the window for the balanced approach between continued debt paydown.
M&A and shareholder return activity. If you remember the history of this company in that three to four range is to pursue shareholder friendly accurate.
Activities through share repurchases onetime dividends those types of things and that gives you the flexibility under four to begin to do those things again so.
On the table as we generate free cash flow deleveraging over the next two years with $1 billion that we're going to generate that's priority one.
And then we'll take a look as we move below four at the <unk>.
Our balanced approach.
One last question and I apologize. If this has been answered already but U S consumer pricing very strong.
Like the private label share right now what are the price gaps is that anything that worries you.
If you could just comment on that.
Well, we're not concerned about the price gaps right now we're not seeing share change on private label versus back we're picking up share.
<unk> tend to prefer a branded so.
That is not necessarily a concern.
Got it.
Throw in my two cents on this I do think that the price gap between private label and Nash.
National brand, mostly us did.
Did get larger than it was.
Remember the the contracts that the retailers had with us re price once a year.
And I think that allowed.
If they were getting.
I think we were losing money on a bunch of those.
Private label.
Deals.
I think youll see a correction that we took pretty significant pricing as much as we possibly could and these are double digit pricing.
That occurred.
But.
We did not see share loss to private label last year in spite of that.
Increased GAAP I think youll see that gap, probably come down, but I think it's worth looking at and we will continue to talk to you guys about that as we look at sort of our pricing versus private label.
I think low concern at this point and probably correcting from last year.
C N. It correct.
So that's that's in the right direction so.
But we do around price elasticity studies, and all of that with our retail partners to be sure that.
More worried about.
Always more worried about category growth.
Sure display.
Sure. Thank you so much.
Welcome.
Thank you. Our next question comes from Carla Casella with JP Morgan Your line is open.
Hi, somewhat on the a little bit of the same lines with the getting to your four times leverage target by year end.
With a slight decline in plywood big debt pay down can you just talk about what you're expecting from working capital and if you still see.
$400 million inventory release for the year and or the timing of that.
Sure.
And just to make sure that's correct, we said $1 billion of.
Free cash flow generated over two years, beginning last I think Q3 and then we also said under four by the end of 2024, so not by the end of this fiscal year.
No.
When you when you are talking through and taken a look at the.
Working capital perspective, the inventory that we are looking to take out is $400 million.
That will take place as we move through the year, obviously, we're in a bit of a field position right now we've talked about the fact that retailer positions are down 5% to 7% versus last year.
And that our production is down year over year. So we will be releasing that inventory that we have in place.
That $400 million and inventory release is going to help generate a working capital benefit this year north of $200 million.
Right, because we're going to grow themselves, we're going to have some AP, that's going to come through and we're going to pay and so the net of all that on working capital is just north of $300 million.
We see the cash from operations excluding.
Working capital.
Less capex to generate the balance of our free cash flow this year and next year and so as we look at it that way youre kind of looking at north of $300 million.
<unk>.
Sort of non working capital related free cash flow plus the working capital release.
Okay, Great and then if I could just ask a follow on.
You said you have strong liquidity with over $800 million available can you just talk about what your drawings were on the ABL versus the AAR facility and if that $800 million availability was the two facilities combined.
The $800 million sitting on our revolver.
ABL and the.
Our facility you're here, we didn't change really over the.
From last quarter that much so I think they're kind of in the.
$400 million range.
Yes for the season.
Okay.
Great. Thank you so much.
Thank you.
Next question comes from William Reuter with Bank of America. Your line is open.
Good morning, good morning.
In terms of your.
I'm trying to think about elasticity you said you guys have done some studies in.
And work with your retail partners.
I know that this varies by product, but is there any way for us to think about how much higher.
Your prices are this year versus last year.
Yes.
Yes.
Yes.
What I would say is we took pricing I don't know August I think right.
Which I think probably average eight or something like that I don't know what it was.
So I think thats, probably what youll see is.
That pricing will show up now remember.
We've got <unk>.
Real Mondo promotion early season so.
I think youll probably see.
Lower retail margins.
In the early season, particularly on loans as we promote very heavily with the retailers.
But.
But I think generally what you would see as 5% to 10% increase in.
And retails compared to a year ago, something like that that's what I would.
Yes, okay.
Don't have the exact number on that yet, but I think remember we sell the retailers set their pricing but.
They're going to pass through some of that pricing.
Are all of it.
So I think 5% to 10% higher than last year is what you should expect to see.
I am sitting across from Joanne <unk>, who is the CFO . Although you go you got it.
The way that she is characterized that previously as from a price elasticity perspective part of the reason that we're pointing to Pos flat in all categories, except for essentially.
<unk> being up 10% is because of that price elasticity right. So.
<unk> prices and some of that is.
Coming in lower volumes, so net net.
What's driving.
The Pos that way.
Great and then just one follow up.
In some of the prepared commentary you discussed that there is risk. This year. You then immediately talked about consumer engagement.
Youre locked in prices on 70% of your products are there other major risks.
I didn't mention there that you guys are thinking about for this year.
No I would say there is.
The Big question always is the consumer.
And maybe throw whether in that because I think that's probably the biggest single factor with the consumer but I think basically in the economy sort of the health of the consumer.
That.
The work we've done on the first half.
Is the work that.
We all know about we build work with our retailers we.
<unk> lowered the shelves merchandise it.
At the end of the day, it's going to come down to the consumer showing up and that of course is the risk that I think everybody in the consumer business.
Looking at again, I think we have a pretty conservative sales number of.
Flat to kind of the world's crappiest year.
Get back half of what we lost last year in loans again, we think that was mostly weather and then I would say Hawthorne.
Just starting to make numbers is probably I would think those are the two risks and.
We're covering a lot of that risk when we say, we can do better than a $185 million.
We've got room to cover.
If we have to.
I think on the positive side, which people are.
Starting to feel a little bit positive, particularly on the consumer side.
Is how much of that money can they reinvest back into the consumer activation.
It's already up but I think patties expectation on the brand side is that.
If they overachieve early season that there is.
More money to continue to push activation. So so I think the big risk is the consumer showing up in Hawthorne.
<unk>.
Springboard savings are ahead of plan and they will continue to be ahead of plan.
And that gives us room to sort of cover.
And I think that answers the question I think.
Perfect. That's all from me thank you.
Thank you.
Thank you that's all the time, we have for questions. Thank you for participating in today's conference. This does conclude the program and you may now disconnect everyone have a great day.
Thank you all.
The conference will begin shortly to raise and lower Johan during Q&A you can dial one one.
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